Ukraine signs $10bn shale gas deal with Chevron

Published Tuesday, November 5, 2013

Ukraine signed a $10bn shale gas production-sharing agreement with US oil company Chevron in a bid to become less dependent on energy from Russia.

The deal to develop the western Olesska field followed a similar shale gas agreement with Royal Dutch Shell in January and has come as Ukraine's relationships with its major energy supplier Russia are becoming rather strained.

"The agreements with Shell and Chevron ... will enable us to have full sufficiency in gas by 2020 and, under an optimistic scenario, even enable us to export energy," said President Viktor Yanukovich.

The highest end of expectations for Olesska's potential reserves would match around three years of European Union gas demand. However, similarly optimistic prospects for shale reserves have already been downsized in neighbouring Poland .

Shale development in Europe is far behind the booming US sector and progress is slow and fragmented. Chevron pulled out of a shale exploration tender in Lithuania and has suspended work in Romania after local protests.

Ukraine Energy Minister Eduart Stavytsky, who signed the deal with Chevron executive Derek Magness, set it in the context of a high price Ukraine pays Russia for its gas.

"This is one more step towards achieving full energy independence for the state. This will bring cheaper gas prices and the sort of just prices which exist (elsewhere) in the world," he said.

Ukraine pays $400 per thousand cubic metres for Russian gas under a 2009 10-year agreement, which Kiev has failed to re-negotiate.

The agreement with Chevron, to extend for 50 years, foresaw an initial investment of $350 million by the US company in exploratory work over two or three years, Stavytsky said, aimed at establishing the commercial viability of shale reserves in the 5,260 square km Olesska region, part of a band of shale which stretches from the Baltic to the Black Sea.

Earlier government figures set total investments, including extraction after exploratory drilling, at around $10bn.

Stavytsky said the Ukrainian side hoped that exploratory work would yield more detailed information about reserves at Olesska by 2015.

It was expected that Olesska would produce 5 billion cubic metres per year - and possibly as much as 8-10 billion cubic metres.

The deal with Shell, which is at a similar level of investment, is for exploration at Yuzivska in eastern Ukraine.

The two shale projects could provide Ukraine with an additional 11 to 16 billion cubic metres of gas in five years, according to projections by the Kiev government.

Ukraine is an important transit route for Russian gas to Europe. In the past, disputes between the two countries led to disruption of supplies to European consumers.The two sides clashed over prices in the winters of 2006 and 2009, with Moscow halting deliveries not only to Ukraine but to the rest of Europe.

With Russia angered over Ukraine's plans to sign a landmark agreement with the European Union which will mark a shift away from Russia's sphere of influence, the issue has flared again.

Stavytsky said on Tuesday that Ukraine had already begun to settle the outstanding bill but gave no details.

Gazprom spokesman Sergei Kupriyanov said his company had recently received $9 million in payments from Naftogaz Ukraine. "It's just a drop in the ocean," he said.

Russian Prime Minister Dmitry Medvedev has since said he sees no reason for Moscow to cut gas supplies to Ukraine over the unpaid bill for now and has played down talk of an imminent "gas war" that might disrupt flows to Europe.